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First of all,the auditor should determine and try to find out the major changes or the modification that would affect the normal relationship have been made in the production and sales area.Audit assistant are responsible to handle on detect the significant adjustment in the policies of company that would affect the item stated in the income statement.After analyse on such adjustment to ensure that no material error is found then it will continue proceed to the final stage of the audit section. For example, significant changes in employee benefits might affect salaries and employee compensation and have an effect on the income statement.
Other than checking in the income statement of a company,the auditor would also look into the balance sheet on the assets and liabilities.Before the auditor start to work on it,a copy of client's balance sheet should be prepare to working papers .
There are procedures of carrying out an audit on assets and liabilities. Auditors shoulds categorize each items in the balance sheet accordingly to the audit checklist.
All of there are the components of assets.
For Cash In Bank
To ensure the information that stated in the column of the balance is complied what it really had in the bank,a confirmation request letter will be sent to all the related bacnk which the entity had dealing with within the financial period.In addition to get confirm to relevant bank that the balance in the bank of the company,the auditors also can get an opportunity to request the bank to provide other information such as the securities that the company held in the safekeeping.
The response from the bank give the company a gold evidence to prove that cash at bank that stated in the balance sheet is complied with the reald amount in bank at the balance sheet date.With the cooperation of bank,the confirmation of cash on deposit provide evidence to the existence of cash at bank and as to rights and obligations. If the balance per bank statement is different, bank reconciliation would have to be done by the audit assistants.
For Account Receivable
A details list of account receivables balances of the customer should be obtain before the auditor and access to the balance.The auditor will trace totals to comparative summary of accounts receivables balance and randomly select customers' account from the listing to send itemized statements to get the response or confirmation of the balance. Review the confirmation replies letter from them and test accounts where there are no replies.Keep track with the potential bad bebts to be written off,if exist,check the opening balances again.
When inventory is material to the financial statements,the auditor is required to attend the entity's physical inventory counting unless it is impraticable.Examine client's physical inventories count determine whether the client's counting methods are effective. The purpose of inventory attendance is to enable the auditor to obtain audit evidence regarding the existence and condition of the inventory and consider if there is any obsolescence in it. The auditor may select a sample of inventory items from the client count records and trace them to the perpetual inventory records for checking purposes.
For Prepayment expenses
Randomly choose the official receipts or documents that can support prepayment expenses and test on it. Then, send conformation letter to conform the amount due.
For Non - Current Assets
The auditor should obtain a list of fixed asset's expenses that register under the client's company such as depreciation charges,loss or gain on the disposal of the fixed asset,net book value,revaluation amount and etc.The revaluation done should be back by the evidence or documentation authorised by the professional. Check to invoice and agree to the description, price, date and etc. The physical existence and the condition of the assets should be check and determine whether it is located at company's premises. As for disposal of fixed assets, ensure that there is proper authorization and that profit or loss on disposal is properly recorded.
For Short - Term Notes Payable
A bank conformation letter should be sent out to inquire loan balance status of the company.Auditors have to calculate the principal and interest paid to check whether it comply to the figure in the balance sheet.
For Long - Term Debts
Review the loan agreement and direct the attention to the relevant information to acquire the accurate interest charged based on the nominal interest rate calculation and auditor have to be ensure that the interest rate stated in the income statement same with the result of calculation.
For Income Tax Account
The documentation of the transcation of the company is required to keep for minumum 7 year required by law. Client is required to show documentation and support for every aspects of company's tax return. For example, if the client claims itemized deductions, receipts for those deductions must be produced. In addition, to justifications for why the taxpayer felt that those deductions were legitimate. Besides that, taxpayers must open their accounting methods to inspection and demonstrate that all of their income was in fact properly documented and claimed on the tax return. This can be done through proper recording and classification for provision for taxation and deferred taxation.
Advice & Informal Communications
As the fieldwork progresses, the auditor discusses any significantÂ findingsÂ with the client. Hopefully, the client can offer insights and work with the auditor to determine the best method of resolving the finding. Usually these communications are oral. However, in more complex situations, memos and/or e-mails are written in order to ensure full understanding by the client and the auditor. A lot of information is shared via e-mail, of course, but there is more face-to-face conversation.Â Other than that, I would like to mention for this communication question is language. Most communications with a greater group of people (and formal meetings) are held in English, however it depends a lot on who is speaking if you will understand that person. Also if it is only me and, say, two other Indians, it is very likely that they switch to Hindi or Kannada (local language) without noticing. I then sometimes have to remind them to stay with English. Distinguishing between first and surnames is also impossible for me, same with deciding if a name is male or female - I just have to guess or find some "neutral" ways to address or ask for people. In particular cases, we may also provide drafts of organizations charts, proposed forms or modifications to forms, financial data or other statistics, or drafts of findings and recommendations that later may be incorporated into the formal audit report. These are all considered informal communications between the auditor and the client. Their purpose is to promote constructive communication and avoid misunderstandings. Our goal: NO SURPRISES.
Audit Summary /Financial monitoring
Upon completion of the fieldwork, the auditor summarizes the audit findings, conclusions, and recommendations necessary for the audit report discussion draft. Write a summary memo to document the results of fieldwork. Conclude as to whether the information reported by the state agency in the Section 1512 reports is accurate, reliable, and timely. The audit summary gives an overview of all work done sheets according to their topics. The audit summary template gives the title, the audit number, the topic of the summary and of the work done sheets, and the creation date. In addition to the work done sheets, the audit summary also contains a summary of the observations and findings as well as an overall assesment and conclusion of the audit result. Before writing the audit summary, auditors should agree the working papers on which the summary is based with their audit lead.
Working papers are a vital tool of the audit profession. They are the support of the audit opinion. They connect the client's accounting records and financials to the auditor's opinion. They are comprehensive and serve many functions. The result of audit activities must be documented truthfully, consistently, clearly, and completely, with a comprehensible description of all material details. This involves both the contents of a fieldwork activity and the procedure itself. This documentation of fieldwork activities is referred to as "working papers" to express its connection with the work results. The basic requirements for proper documentation apply to all types of fieldwork activities, although there are different types of documents, depending on the nature of the audit. In addition to the working papers which are mandatory, other documents can be created as optional extras; they contain information beyond the minimum information requirement. The working papers are an indication of the audit quality in general. This needs to be considered because queries by different groups of addressess or their requests for information may often require access to this documentation. Accordingly, the working papers may serve as discussion or evidence documents, for example for queries from the Board, the unit requesting the audit, Internal Audit Management, the Audit Committee, or the external auditors. The preparation of working papers is suject to certain organizational requirements. Each auditor always has the main responsibility for preparing the documents, both during and immediately after fieldwork. Even though the audit lead and Audit Manager have ultimate responsibility for quality assurance, each auditor has to prepare and maintain the working papers with the necessary attention to detail. Working papers may be compiled by hand or entered directly into a system (which is normally more expedient, because it makes it easier to access the information again).